Macroeconomic Effects of Budget Deficits in Uganda: A VAR-VECM Approach

Macroeconomic Effects of Budget Deficits in Uganda: A VAR-VECM Approach

This paper investigates the relationship between budget deficits and selected macroeconomic variables for the period 1999 to 2011 using Vector Error Correction Model (VECM), pairwise granger causality test and variance decomposition techniques. Results indicate that the variables under study are co-integrated and thus have a long run relationship. Results based on the VECM reveal unidirectional causal relationships running from budget deficits (BD) to current account balance (CAB), inflation to BD and BD to lending interest rates. But the results show no causal relationship between gross domestic product (GDP) and budget deficits in Uganda. The Pairwise Granger Causality test results reveal unidirectional causal relationships running from budget deficit to current account, BD to GDP, inflation to BD, and a bi-directional causal relationship between the current account balance and GDP. Variance decomposition results show that, variances in the current account balance and GDP are mostly explained by the budget deficit followed by lending interests while variance in lending interest rates is mostly explained by inflation followed by GDP, variance in the Inflation is mostly explained by variance in lending interest rates followed by the current account balance.

Date:	2014-06-09
Author:	Musa Mayanja Lwanga and Joseph Mawejje

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• Published Jun 9, 2014